Coal prices dent earnings

A prolonged weakness in commodity prices is taking its toll on coal producers with some brokers virtually halving their earnings expectations.

Credit Suisse expects a 45 per cent decline in average company earnings for coal producers during this financial year. The broker also forecasts earnings for the 2014 fiscal year to fall by 36 per cent.

Cockatoo Coal
,
Whitehaven Coal
and
Yancoal Australia
are expected to suffer the largest downgrades due to lower-margin operations and higher debt levels.

Despite this Credit Suisse analyst Paul McTaggart believes that the coal sector is now cheap and presents an opportunity to buyers who can take a longer term view. “The development companies are particularly cheap," he said, and that junior coal producers face the challenge of eventually needing to raise capital in a lacklustre sharemarket to fund pipeline projects. “The juniors will do best when sentiment improves," he said. “Whitehaven Coal is also cheap. But the company won’t generate a whole lot of earnings per share over the next two years as it has issued shares to buy an asset that won’t be in production until 2014. This has happened at a point in time when thermal coal prices have come back sharply. But there is still value there for people who can look past that," Mr McTaggart said.

A revision of coal prices, which prompted the downgrades, follows a combination of softer global growth than forecast, weak steel production and a supply surplus that is prevalent outside of premium hard coking coal.

Thermal coal prices have been particularly hard hit over the past 12 months and with more falls expected, growth forecasts are tipped to be revised lower for the next three calendar years before rebounding.

A year ago Japanese thermal coal prices were at $US115 a tonne and today they are around $US83 a tonne.